Case Study1:

Majority of financial planners and famous investors believe that some assets in the financial statement are not really assets. For example, Robert Kiyosaki, in one of his books, mentions that residence and automobiles are considered liabilities. According to his definition, assets are supposed to bring you cash or revenue and liabilities are those that use cash or consume cash. Hence, automobiles and houses consume cash through their mortgages and maintenance expenses.

There is a famous statement by Wayne Dyer, "we are today the sum total of all the decisions that we have made". On the other hand, our financial position/statement is the result of all the financial decisions that we have made in the past, which can provide an exceptional understanding of the person.

A snapshot of one's finances will provide a history, a trend, ability or lack of ability, and even competence or non-competence of the person to manage his/her finances. A financial statement is also a great reflection of one's risk profile. Of course, a financial statement is not there to judge a client but to understand the client and work with many objectives.

Therefore, financial ratios, as used in accounting, is utilised to analyse an individual's financial position.

Net Worth Statement as at 31 December 2015 for Mr Alvin Ng's and family

Cash/cash equivalents

Checking account

2,000

Money market account

9,000

Fixed deposits

11,000

Savings account

6,000

Life insurance cash value

10,000

Total cash/cash equivalents

38,000

Investment assets

EPF balance

80,000

Stock portfolio (market value as at 31 December 2015)

5,000

Savings Bonds

5,000

Unit trusts (Net asset value)

5,000

Total investment asset value

95,000

Personal use assets

Personal property (e.g. furniture and fittings, jewellery, clothing)

20,000

Residence house (current market value)

300,000

Automobiles (current market value)

25,000

Total value of personal use assets

345,000

Total Assets

478,000

Liabilities and Net Worth

Liabilities

Car loan

38,000

Housing loan

180,000

Credit Card outstanding

1,000

Other loans and

2,000

Total Liabilities

221,000

Net Worth

257,000

(Different between Total Assets and Total Liabilities)

Total Liabilities and Net Worth (equals Total Assets)

478,000

Cash Flow Statement For the Year ended 31 December 2015

CashInflows

Salaries

84,000

Distributions from unit trusts

3,000

Interest income

2,000

Dividends received

4,000

Bonuses

10,000

Total Inflows

103,000

CashOutflows

Savings and Investments

5,000

Fixed payments on loans/credit cards/insurance

Mortgage payments

16,000

Insurance premiums

5,500

Taxes (Pay as you earn)

13,000

Auto loan payments

8,000

Credit card payments (minimum payments)

8,200

Total fixed outflow

50,700

Variable payments

Food

15,000

Child expenses (food, clothing, and education)

3,400

Transportation costs

11,000

Utilities and household expenses

13,000

Clothing and personal

8,800

Medical/dental care for family

2,600

Entertainment

13,000

Miscellaneous

1,000

Total variable outflow

67,800

Total Outflows

123,500

Net Inflow (outflow)

(20,500)

Question 1

Calculate and evaluate the FIVE(5) major financial ratios of the above personal net worth statement. Liquidity ratio, Savings ratio, Debt to asset ratio, Debt service ratio, Net investment assets to net worth ratio.(25 marks)

[Total = 25 marks]

Question 2

Referring to your answer in Question 1, interpret and comment on the FIVE (5) major financial ratios of the above personal net worth statement.(25 marks) [Total = 25 marks]

Question 3

Critically evaluate the concept of the time value of money as an essential role in the financial planning domain. (25marks) [Total = 25 marks]

Question 4

Critique the concept of pure time preference, inflation and risk on the components of the interest rate. (25 marks) [Total = 25 marks]